I was formerly on the admissions committee for a graduate program. At that particular university, there were TWO programs (listed in the Undergraduate catalog) to assist students who'd had a lost semester; depending upon what was in the student's best interest, the semester could be entirely wiped out.
As for the admissions process, students were required to write 2 essays, and had the option of writing a third one, the third essay being about any additional information the student WANTED the committee to take into account. One applicant wrote about a semester when her grades dropped dramatically...because her sister, who was terminally ill, had moved into her home. That she continued in classes and passed them respectably was VERY much in her favor with the admissions committee. So a bad semester, with a good explanation, isn't a death knell.
Be sure to ask the current university how they'd handle the transferred credits, as the first university's policies would not necessarily be binding upon the current university. For example, a 'fresh start' program at University 1 might require the student to be successful in a future semester before changing the grades, and University 2 may have the policy of not changing a grade once it's transferred in.